wealth of choice - Hesta responsibility for the products and services offered ... Asset classes fall into two groups: ... • includes loans to companies operating in such sectors

Investment choices

1 July 2018The information in this document forms part of the following product disclosure statements:• HESTA product disclosure statement issued 1 July 2018• HESTA personal super product disclosure statement issued 1 July 2018

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11 investment options designed to better suit your needs

strength in numbers

MySuper authorised default option

a truly national fund

24/7 account access

a history of strong, long-term returns

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Understanding risk and return 4

Asset classes 6

Choosing how your super is invested 10

Ready-Made Investment Pools 14

Your Choice Asset Classes 16

Other things to note about HESTA investment options 20

Fees, costs, policies and advice 21

Investment policies 22

Your guide to investment terms 28

HESTA education and advice – how can we help? 30

what’s inside?

Issued by H.E.S.T. Australia Ltd ABN 66 006 818 695 AFSL No. 235249 Trustee of Health Employees Superannuation Trust Australia (HESTA) ABN 64 971 749 321.

The information is current at the date of preparation 15 June 2018 and may change from time to time and may not be up-to-date at the time you receive this PDS. Information in this document forms part of the HESTA Product Disclosure Statement (PDS) issued 1 July 2018 and the HESTA Personal Super PDS issued 1 July 2018. To access other parts of the relevant PDS or the most up-to-date version of this document free of charge visit hesta.com.au/pds, or call 1800 813 327. Before making a decision about HESTA products you should read the relevant Product Disclosure Statement, and consider any relevant risks (hesta.com.au/understandingrisk).

This document does not relate to the HESTA Income Stream. Refer to the HESTA Income Stream PDS for information about that product.

The information provided in this document is general information only and does not take account of your personal financial situation or needs. You should look at your own financial position and requirements before making a decision. You may wish to consult an adviser when doing this.

You should be aware that the value of your investment may rise or fall. Past performance is not a reliable indicator of future performance.

If you leave HESTA you may get back less than the amount of contributions paid because of the level of investment returns, charges and the impact of tax.

Third-party services are provided by parties other than us and terms and conditions apply. We accept no responsibility for the products and services offered by third parties or any liability for any loss or damage incurred as a result of services provided by third parties. You should use your own judgement when considering such products or services.

Superannuation Advisers and Associate Superannuation Advisers are representatives of H.E.S.T. Australia Ltd. HESTA Financial Planners are Authorised Representatives of Industry Fund Services Ltd (IFS) ABN 54 007 016 195 AFSL No. 232514. H.E.S.T. Australia Ltd has shares in the company that owns IFS, but does not receive any commissions as a result of members using their services. IFS is responsible for the advice given by its authorised representatives.

For updated information visit hesta.com.au or call 1800 813 327. Free call applies from Australian landlines. Charges may apply to other calls.

This document has been produced to international environmental management standard ISO14001 by a certified green printing company using recycled paper.

Product ratings are only one factor to be considered when making a decision. See hesta.com.au/ratings for more information.

contact [email protected] | 1800 813 327 | Locked Bag 5136, Parramatta NSW 2124 | hesta.com.au

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how to use this guideThis guide gives you detailed information about investing with HESTA. If you’re choosing a new investment strategy or revising your current choices, this guide can assist you to make the right investment choice for your future.

choosing an investment strategy

Step 1 Understand some investment fundamentals ✓ risk and return ✓ work out how much you might need

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Step 2 Look at the asset classes we invest in, and consider your risk profile ✓ growth and defensive assets ✓ diversification and different types of assets

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Step 3 Compare different investment options and associated fees and costs ✓ Ready-Made Investment Pools and Your Choice Asset Classes 14-19

Step 4 Decide if you need advice before making an investment decision ✓ Read more about the advice we provide members 30-31

Step 5 Choose an investment option or mix of options ✓ Submit your choice to Member Online at hesta.com.au/mol

Something you don’t understand?Some of the terminology may be new to you — see our glossary pages 28-29

What if I change my mind about my investment choice?You can always change your investment strategy if your personal circumstances change. There is no extra cost to change your investment choice.

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understanding risk and return

An investment’s value reflects the value of its underlying assets. This can change as the market value of those assets rises or falls or, for some investments, as you receive income from that investment.

Investing always involves some degree of risk. The level of risk will depend on the nature of the underlying investments and the approach taken to achieve a return.

Your attitude to riskBefore choosing an investment strategy consider how prepared you are for fluctuations in your investment returns and account balance.

Your attitude to risk is likely to change over time. You should regularly review your investment strategy to make sure it still meets your needs.

The risk you won’t have enough savingsWhile investment risk is one type of risk, another key risk of super is that your savings may not be enough to support your retirement expectations. If you're anticipating your savings lasting your lifetime, you should consider the risk that you might outlive your savings. This is also known as longevity risk.

When considering investment risk it’s important to also think about making sure your investments earn enough returns i.e. you take enough investment risk to achieve adequate growth of your savings.

All our diversified investment options have Consumer Price Index (CPI) + investment targets. CPI is a measure of the cost of living (see page 29). Achieving a long-term return above CPI ensures that the purchasing power of your savings is not eroded by inflation.

It's important to note that the amount of your super benefit at retirement may not meet your expectations due to the impact of risk factors. You should read the important information about risks of super before making an investment decision. Go to hesta.com.au/pds and read Risks of super.

risk:

the chance the amount earned (the returns) on your investments is different (higher or lower) than what you expect.

return:

how much you earn on your investment.

Generally, the higher the expected return for an investment, the

higher the investment risk.

Some investments have a higher return, does this mean they might involve more risk?


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How much will I need?The lifestyle you want, and can afford, in retirement is a personal question. Everyone has a different idea of what constitutes an acceptable lifestyle.

The Association of Australian Superannuation Funds (ASFA) provides a quarterly measure of how much the average person or couple may need for a modest* and a comfortable^ lifestyle in retirement. You may be eligible for the Age Pension, which can also help fund your retirement income. For the latest information on the Age Pension visit humanservices.gov.au/agepension

ASFA Retirement Standard

Single (p.a.) Couple (p.a.)

Modest* lifestyle $27,368 $39,353

Comfortable^ lifestyle $42,764 $60,264

These figures are for the March quarter 2018. They assume you own your own home and show household spending. To see the full table visit the ASFA website at www.superannuation.asn.au/resources/retirement-standard

How long might my savings need to last?Australia has one of the highest life expectancies in the world. While it’s great that we’re all living longer, it also means our savings have to last longer too. It may surprise you that someone who currently retires at 65 will need their savings to last more than 20 years.

This table provides an idea of the average life expectancy at given ages. If you’re planning on your super helping support your retirement lifestyle, life expectancy can give an indication of how long your potential investment time frame may need to be.

Age Male life expectancy (years)

Female life expectancy (years)

20 61 65

30 51 55

40 41 45

50 31 35

60 21 25

70 11 15

Source: Australian Bureau of Statistics 3302.0.55.001- Life Tables, States, Territories and Australia, 2014 - 2016.

*A modest lifestyle: better than the Age Pension alone, but still only able to afford fairly basic activities.

^ Comfortable lifestyle: this income enables a good standard of living. A retiree could afford a broad range of leisure and recreational activities, including purchasing household goods, private health insurance and the occasional international holiday.

http://humanservices.gov.au/agepension

http://www.superannuation.asn.au/resources/retirement-standard

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asset classes

Mixing assets is key to managing riskTo manage the risk investment always carries, you can spread your investments across a range of different types or assets.

Why diversify?When it comes to investing, your grandmother was right about not having all your eggs in one basket. Spreading investments across a range of assets and asset classes (diversification), aims to reduce the impact should any one of these asset classes underperform.

A diversified investment strategy recognises that each asset class behaves in a different way. As one asset class rises another may fall. By carefully managing the relationship between various asset classes, it is possible to produce a group or portfolio of investments with a lower risk for the targeted return. This is a common strategy used for many diversified portfolios, including Ready-Made Investment Pools (pages 14-15).

Growth and Defensive assetsAsset classes fall into two groups:

Growth asset Defensive asset

• generally higher risk than defensive assets

• returns generally from change in capital value rather than income

• examples: Australian and international shares, private equity

• returns likely to be more volatile but are expected to be higher over the long-term

• have a higher probability of a negative return in any one year (see probable number of negative returns for each investment option pages 14-19).

• lower risk but lower returns over the long-term

• returns primarily from income not an increase in the value of investment/s (capital value)

• likely to produce lower volatility (fluctuations) in return

• lower chance of negative return in any one year

• still have some risk — for example, bonds drop in value when interest rates rise

• examples: cash and global debt.

Some assets, such as infrastructure and property, can have both defensive and growth characteristics because they earn their return from both ongoing income and capital growth.

What about market conditions?The risk and return of an investment will also depend on market conditions (rising, steady, falling) when you invest. Investing in an asset after markets have risen may expose your savings to a higher risk of a drop in value. This is a reason why investing in last year’s best performing asset class can lead to disappointing investment performance.

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Asset classes we invest inEach investment option contains one or more of the asset classes described below:

Asset class Description* Risk and return characteristics

Cash Money invested in:

• short-term deposits• bank bills• enhanced cash products.

• all returns expected from income• very stable lower-risk investment• fairly consistent returns• lowest long-term rate of return• defensive asset.

Global Debt Term deposits

• issued for a specific term and interest rate.

Bonds

• government and company bonds paying a fixed income annually — can be bought or sold, earning capital gains or losses as well.

Unlisted debt

• includes loans to companies operating in such sectors as property, private equity and infrastructure — aims to take advantage of shortages in debt funding from traditional financial market players like banks

• these debt instruments typically provide interest income over their life, as well as a lump-sum return of the amount originally invested (principal) at the end — their value can change due to market factors such as movements in interest rates. Typically they are much less sensitive to interest rates than bonds.

Alternative defensives (may include assets other than Debt that provide more defensive characteristics than Debt in certain market environments).

• alternative investment to bonds — aims to provide some returns protection for Ready-Made Investment Pools during adverse economic conditions

• investments that are market traded (liquid) and actively managed (particularly asset allocation)

• may include lower-risk hedge funds.

• expected moderate level of risk and moderate returns

• returns earned primarily from income

• generally considered defensive assets

• some fixed interest and unlisted debt investments may target higher returns, giving these investments growth characteristics as there is more risk involved

• alternative defensives provide some buffer during times of market stress, similar to bonds, and can include higher risk assets.

Property • includes investments in office buildings, factories and shopping centres

• returns from rental income and capital growth, giving assets both growth and defensive characteristics.

• can earn better returns than cash or global debt

• may be more volatile• defensive property is expected to

earn most of its returns from rental income and has a moderate level of risk

• growth property is expected to earn most of its returns from capital gains

• moderate to higher-risk investment.

*Actual investments in an asset class may include some or all of the types of investments described for that asset class at any given time.

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Asset classes we invest inEach investment option contains one or more of the asset classes described below:

Asset class Description* Risk and return characteristics

Infrastructure • includes roads, airports, power stations and other key community projects

• can take many forms, including direct ownership (equity) in a development, operating business or asset

• can also include loans to a participant in a development

• has growth and defensive characteristics i.e. returns from both ongoing income and capital growth.

• returns vary depending on type of asset• can generate better returns than cash,

global debt and property• can also be more volatile• defensive infrastructure is expected to earn

most of its returns from income and has a moderate level of risk

• growth infrastructure is expected to earn most of its returns from capital gains

• considered moderate to higher-risk investment

• HESTA reduces risk by investing in existing operating businesses and a diverse range of assets.

Australian & International Shares

• listed shares (equities) provide ownership interest in a company

• can be diversified across industries and markets

• returns primarily from capital gains (increase in share price)

• smaller proportion from income (dividends).

• Australian shares are only 2% of the world share market — can be higher risk as they may not reflect global economy

• international shares come from developed and emerging markets (developing economies)

• emerging markets can offer a chance of higher returns but have a high to very-high risk

• over the long term shares expected to earn higher returns than cash, global debt, property or infrastructure

• may produce more volatile (potentially negative) returns over the short term

• higher-risk growth investments• investors can also reduce some risk and

profit from managers short selling (see page 29).

Alternative Growth

• targets high returns through investing opportunistically in a wide range of asset classes

• for the Ready-Made Investment Pools, this asset class will include investments in Private Equity which is mainly investments in unlisted companies (i.e. not on stock exchange)

• for Your Choice Private Equity, this asset class will include only Private Equity

• particular focus on asset classes offering higher returns than normal due to financial market dislocations or complexity

• investment strategy may involve short selling of shares and other assets.

• returns primarily from capital gains• strategies may target higher returns over

medium-term or longer-term — means they are high risk

• carries higher risk than listed shares• less liquid (not easily traded) and

investment style longer-term• considered higher-risk investment.

*Actual investments in an asset class may include some or all of the types of investments described for that asset class at any given time.

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risk profilesEveryone has a different level of comfort with investment risk. What risk profile you are can also depend on the return you're seeking and how long you want to stay invested for.

Your ‘risk profile’ may vary over time as your life circumstances and financial situation change. Below are five typical types of investors. They are general descriptions only and your individual needs may be different. You should consider discussing your personal circumstances with an adviser before making an investment choice.

Matching your risk profile to the HESTA investment optionsYou can use our online Risk Profiler at hesta.com.au/calculator to help you get an indication of your risk profile. Keep your profile in mind as you read about each investment option (pages 14-19). It may help you decide which option(s) best suit you.

Moderate• may be willing to have some exposure

to growth assets to increase the likelihood of a greater investment return over short to medium term

• likely to have some tolerance for year-to-year variation in returns, including occasional negative return

• typically will have a minimum investment timeframe of 3–5 years

• generally choose to invest in 40–59% growth assets.

Cautious• typically may be unwilling to accept a

short-term capital loss• usually is investing over a short time-period

(less than 1 year)• may choose to invest in 100% defensive assets.

Defensive• generally the priority is the preservation

of capital in the short term, with limited tolerance for capital loss

• typically will have a minimum investment timeframe of 1–3 years

• whilst typically invests in defensive assets, could allocate 15–39% to growth assets.

Aggressive• may be willing to have a high exposure

to growth assets to increase the likelihood of a greater investment return over the long term

• strong tolerance for short-term fluctuations in the value of investments, including negative returns, with an aim of maximising returns over the long term

• typically has a minimum investment timeframe of 7–10 years

• likely to invest over 80% of capital in growth assets.

Assertive• may be willing to have a substantial exposure

to growth assets to increase the likelihood of a greater investment return over medium to long term

• generally accepts short-term fluctuations in the value of investments, including negative returns, with an aim for higher returns over the long term

• typically has a minimum investment timeframe of 5–7 years

• likely to invest 60-79% of capital in growth assets.

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choosing how your super is investedUnless you’ve previously chosen a different investment option, your super is currently invested in our MySuper-authorised default option, Core Pool (see page 14).

Core Pool is where the majority of HESTA members have their super. Because it's our default investment option, if you haven't made an investment choice, all your super is automatically invested in Core Pool.

Let Core Pool do the workCore Pool is designed to provide a diversified portfolio of assets with a balanced-growth orientated approach. This reflects the long-term nature of super, where your savings need to grow enough so they are not eroded by inflation (see pages 4-5 for more information on investment risk and how long you may need to be invested).

We’ve designed Core Pool with the needs of our members, who are predominately in health and community services, in mind. We looked at our typical members and it showed us that we need to set the bar higher than many other default options.

Core Pool aims to provide high enough returns over the long-term to help move our members — most of who earn moderate to low incomes — from a modest to a more comfortable retirement lifestyle (as outlined on page 5). So, Core Pool’s CPI + 4.0% long-term investment objective is higher than a lot of other default investment options.

Since inception in 1987, Core Pool has outperformed its long-term investment objective of CPI + 4.0% with a return of 8.77% p.a., above its target of 6.93% p.a. Over the medium-term (5 years), Core Pool has achieved an 10.33% p.a. return, strongly outperforming its CPI + 3.0% objective (5.97% p.a.)* set two years ago. Poor share market returns during the Global Financial Crisis in 2008 and 2009 still dominate the 10-year investment return of 5.23% p.a., which is below Core Pool’s target of 6.35% p.a.

*The CPI movements and returns shown are as at 30 June 2017. Returns are net of indirect costs and taxes

Asset allocation is keyCore Pool is invested in a diverse but balanced mix of assets. By investing this way, we aim to provide a less volatile return than might typically be expected in an investment with Core Pool’s investment objective.

The key to this approach is how we blend the different mix of assets that Core Pool is invested in. How much we allocate to each asset class in Core Pool aims — over the long term — to give some protection in adverse investment conditions through some investment in defensive assets, while maintaining overall exposure to growth assets.

Growth and protection — a balanced approachIn return for this downside protection (i.e. way to limit or reduce potential losses), we anticipate the possibility of a slightly lower return compared with other default options when markets are strongly positive.

It’s a patient investment approach that focuses on achieving steadier long-term returns, which will make the biggest impact on your savings.

The past performance of an investment option isn't a reliable indicator of future performance.

Over time your investments can be affected by factors including changing economic conditions and currency

fluctuations. For example, there are irregular cycles of 'bull' (rising) and 'bear' (falling) share markets.

If an investment option has done well in the past does this mean it will continue to perform strongly?

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Choose from one of our investment poolsReady-Made Investment Pools provide a range of diversified options, spreading your super across different asset classes. They are suited to an investor wanting to diversify their investments, but who doesn’t want to tailor their own portfolio.

Ready-Made Investment Pools

Investment Pool Category Page

Conservative PoolCore PoolShares PlusEco Pool

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Investment objectivesEach pool has medium and long-term (10-year) objectives. Medium-term objectives give members better insight into performance targets over the next five years. Investment objectives are not a guarantee of performance, but reflect what our investment experts think is an achievable return for a particular option, given its level of investment risk.

How is each pool invested?Each pool uses a different mix of asset classes — known as the strategic asset allocation — to pursue its objectives.

The pools each have both their long-term strategic asset allocation to particular assets and an agreed allocation range, as discussed on page 14 and 15. The ranges allow us to adjust investments according to changing market conditions. For example, if we expect a sudden downturn in the share market, we could reduce exposure to shares in favour of cash to better protect returns over that period.

Impact InvestingIf you invest in our Core Pool, Conservative Pool or Shares Plus option, you will have exposure to investments made under our Social Impact Investment Program. This program was established in 2013 to enable us to make investments which produce a financial return in line with what we expect from traditional investments and also provide a genuine social impact which, in many instances, will be in the health and community services sectors. Our first Australian investment involves providing loans to a community housing provider in Queensland, who used the capital to restructure a business with a view to generating new social and affordable housing stock in that state. We have also made an investment in a fund focused on providing access to affordable insurance and savings products to under-served communities in Africa and Southeast Asia.

Age 43 yearsJob Disability Support OfficerGross Salary $45,000 p.a.HESTA super account balance$20,000

Emma decided to check where her super was invested because she didn’t choose an investment option when she joined HESTA.Emma found her super was invested in Core Pool, our MySuper-authorised default option. Emma wants to enjoy a comfortable lifestyle in retirement with enough money to go on occasional overseas trips and to eat out from time to time. Core Pool’s balanced growth approach could help achieve Emma's goals.Core Pool’s long-term investment objective of CPI + 4.0% is designed to be high enough to assist a typical HESTA member to move from a modest to a more comfortable retirement lifestyle.Core Pool has 71.0% of its investments in growth assets. Given her retirement goals, Emma wants substantial exposure to growth assets as they’re expected to provide higher returns over the long term than defensive assets (see page 6).But Emma still wants some protection in adverse investment conditions. Core Pool invests in a diversified but balanced mix of assets, which includes a 29.0% investment in defensive assets. This aims to provide a less volatile return than would otherwise be expected in an investment with Core Pool’s long-term investment objective.

meetemma

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Design your own portfolioYour Choice Asset Classes give you the ability to tailor your own diversified portfolio. You can also invest in a single asset class, such as Cash.

Investors using these options rather than the Ready-Made Investment Pools should have a good understanding of the risks associated with different types of investments and the fundamental principles of investing.

You can choose your own asset allocation (where you want to invest) and the level of risk you want to take. Create your own asset mix from the seven Your Choice Asset Classes below:

Asset Classes Page

CashGlobal BondsPropertyInfrastructureInternational SharesAustralian SharesPrivate Equity

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Investment objectives for Your Choice Asset ClassesYour Choice Asset Classes have investment objectives based on market indices for each asset class (with the exception of Your Choice – Infrastructure and Your Choice – Property – see below). Asset class indices are widely used in the super industry. This makes it easier for HESTA members to compare our Your Choice Asset Classes with similar asset class-specific investment options.

These indices also give members better insight into the long-term performance of Your Choice Asset Classes compared with the markets for these asset classes. You can read more about the indices that make up relevant benchmarks on page 29.

Indices for unlisted asset classesFor unlisted asset classes, (Your Choice – Private Equity, Your Choice – Infrastructure and Your Choice – Property) there is no readily available index.

Your Choice - Private Equity uses listed equities indices as part of its investment objective.

Private Equity investments are expected to provide diversification, with asset values typically fluctuating less than listed equities. When listed equities markets are very strong, private equity is expected to still produce positive returns but underperform listed equities. However, when listed equities markets fall, private equity is expected to fall less, or possibly still rise, outperforming listed equities.

Because there is no readily available, suitable index for infrastructure, we use a CPI-based investment objective for Your Choice – Infrastructure to reflect that the primary purpose of investing in infrastructure is to provide relatively stable returns that exceed the rate of inflation. For similar reasons, we also use a CPI-based investment objective for Your Choice – Property.

How is each Your Choice Asset Class invested?Each Your Choice Asset Class is primarily invested in one specific asset class, but may have a strategic asset allocation to cash to help reduce risk and manage liquidity. The strategic asset allocation ranges allow us to adjust investments according to changing market conditions.

Create your own mixYou can create your own combination of Ready-Made Investment Pools and Your Choice Asset Classes to suit your specific investment needs.

Split your strategyYou can create one strategy for your current super balance, and a different strategy for future contributions and transactions (such as rollovers or lump-sum cheques).

✓✓ You can create your own mix or split your strategy by submitting your changes on Member Online at hesta.com.au/mol


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Yes, but concentrating your investments in a small range of asset classes means you won’t receive the

benefits of diversification (including reducing the risk profile of your investment). To help lower your

investment risk, you should consider spreading your investments over a wider range of asset classes.

can I invest in just one or two Your Choice Asset Classes?

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ready-made investment poolsInvestment Options Conservative Pool Core Pool (our MySuper default option) Shares Plus Eco Pool

Investment objective Medium-term (5 years) CPI + 1.5% Long-term (10 years) CPI + 3.0%

Aims for the lowest year-to-year variation in returns of all Ready-Made Investment Pools, although with lower expected rates of return than Core Pool over the long term.

It is designed to:• be the most conservative of HESTA Pools• offer members a low-risk investment• seek greater returns than cash alone.

Medium-term (5 years) CPI + 3.0% Long-term (10 years) CPI + 4.0%

Aims to optimise returns while only occasionally having a return less than zero.


Aims to provide higher long-term returns than Core Pool. Since there may be substantial year-to-year variation in returns, even in the longer-term. It may not outperform other Pools. It has a diversified portfolio that includes assets other than shares.


Aims to optimise long-term returns while investing in companies that demonstrate best practice sustainability performance within their industry sector, relative to their peers.

Its high allocation to shares means there is likely to be significant year-to-year variation in returns. It may be more suitable for an investor with a higher tolerance to investment risk. Although we expect long-term returns similar to Core Pool, it may not outperform other Pools, even in the long term.

Strategy Asset allocation includes:• more exposure to cash and debt markets than

other Ready-Made Pools• approximately 25% of investments in shares.

Shares tend to have a low correlation, or relationship, with cash and debt and as one rises in value, the other may be expected to fall. Investing a proportion in shares helps reduce risk while enhancing the potential return over the longer term.

Invests in a diversified but balanced mix of assets. Aims to provide a less volatile return than would otherwise be expected in an investment with its investment objective.

Has a mixed asset allocation, with more exposure to the share market than Core Pool. However, its diversification means that it has a lower risk profile than an investment in shares alone.

Invests in companies with superior environmental, social and governance performance as assessed by our managers. Eco Pool has investment exclusions concerning uranium, fossil fuels, tobacco and controversial weapons. See investment policies for details (page 22). Property investments are screened to ensure they meet appropriate environmental requirements. Currently, the Alternative Growth investments are in Cleantech (see page 28).

Probable number of negative annual returns over 20 years

1 to less than 2 3 to less than 4 4 to less than 6 4 to less than 6

Risk level Low to medium Medium to high High High

Suggested minimum investment timeframe

1 to 3 years 5 to 7 years 7 to 10 years 7 to 10 years

Type of investor this option may suit

Defensive Assertive Aggressive Aggressive

Strategic asset allocation

Asset class Strategic allocation

Allocation range

Australian Shares

13.7% 7-18%

International Shares

10.3% 5-15%

Infrastructure 10.3% 2-20%

Property 9.5% 2-20%

Global Debt 34.2% 10-50%

Cash 22.0% 15-50%


Allocation range

Australian Shares

29.0% 17-37%


23.0% 16-36%

Alternative Growth

7.0% 0-14%


Property 11.5% 3-20%


Cash 2.0% 0-30%


Allocation range

Australian Shares

39.7% 23-49%


31.6% 16-42%

Alternative Growth

10.0% 0-20%


Property 8.0% 2-16%

Global Debt 0% 0-10%

Cash 2.0% 0-25%


Allocation range

Australian Shares

35.2% 23-47%


28.8% 17-41%

Alternative Growth

4.0% 0-10%

Infrastructure 0% 0-10%

Property 8.0% 0-16%


Cash 8.0% 5-30%

Overall growth/defensive split** Growth 33.9%

Defensive 66.1%

Growth 71.0%

Defensive 29.0%Growth 89.7%

Defensive 10.3%

Growth 72.0%

Defensive 28.0%

Performance Since inception (% p.a.)^

to 30 June

10yrs* 7yrs* 5yrs* 3yrs* 1yr

6.51% 4.89% 6.64% 7.08% 6.00% 6.66%

Since inception (% p.a.)^

to 30 June


8.77% 5.23% 8.96% 10.33% 7.95% 10.96%


to 30 June


8.47% 5.35% 9.68% 11.78% 8.45% 12.79%


to 30 June


6.41% 6.52% 10.72% 13.86% 11.67% 14.54%

Ânnualised return covering the period 1/7/1995 to 30/6/2017. Ânnualised return covering the period 1/8/1987 to 30/6/2017. Ânnualised return covering the period 1/7/1995 to 30/6/2017. Ânnualised return covering the period 1/2/2000 to 30/6/2017.

Investment Fee & Indirect Cost Ratio* 2017/18

Investment fee 0.46% p.a.Indirect Cost Ratio 0.09% p.a.




*Annualised return as at 30/6/2017. Past performance is not a reliable indicator of future performance and the value of your investment can rise or fall. The returns shown are net of investment fees, indirect costs and taxes as at 30 June 2017. For more information about the investment fee and indirect costs see page 21. **The growth/defensive split relates to the strategic allocation and may change as asset allocations move within the allocation range.

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Investment Options Conservative Pool Core Pool (our MySuper default option) Shares Plus Eco Pool

Investment objective Medium-term (5 years) CPI + 1.5% Long-term (10 years) CPI + 3.0%

Aims for the lowest year-to-year variation in returns of all Ready-Made Investment Pools, although with lower expected rates of return than Core Pool over the long term.

It is designed to:• be the most conservative of HESTA Pools• offer members a low-risk investment• seek greater returns than cash alone.


Aims to optimise returns while only occasionally having a return less than zero.


Aims to provide higher long-term returns than Core Pool. Since there may be substantial year-to-year variation in returns, even in the longer-term. It may not outperform other Pools. It has a diversified portfolio that includes assets other than shares.


Aims to optimise long-term returns while investing in companies that demonstrate best practice sustainability performance within their industry sector, relative to their peers.

Its high allocation to shares means there is likely to be significant year-to-year variation in returns. It may be more suitable for an investor with a higher tolerance to investment risk. Although we expect long-term returns similar to Core Pool, it may not outperform other Pools, even in the long term.

Strategy Asset allocation includes:• more exposure to cash and debt markets than

other Ready-Made Pools• approximately 25% of investments in shares.

Shares tend to have a low correlation, or relationship, with cash and debt and as one rises in value, the other may be expected to fall. Investing a proportion in shares helps reduce risk while enhancing the potential return over the longer term.

Invests in a diversified but balanced mix of assets. Aims to provide a less volatile return than would otherwise be expected in an investment with its investment objective.

Has a mixed asset allocation, with more exposure to the share market than Core Pool. However, its diversification means that it has a lower risk profile than an investment in shares alone.

Invests in companies with superior environmental, social and governance performance as assessed by our managers. Eco Pool has investment exclusions concerning uranium, fossil fuels, tobacco and controversial weapons. See investment policies for details (page 22). Property investments are screened to ensure they meet appropriate environmental requirements. Currently, the Alternative Growth investments are in Cleantech (see page 28).


1 to less than 2 3 to less than 4 4 to less than 6 4 to less than 6

Risk level Low to medium Medium to high High High


1 to 3 years 5 to 7 years 7 to 10 years 7 to 10 years


Defensive Assertive Aggressive Aggressive

Strategic asset allocation


Allocation range

Australian Shares

13.7% 7-18%


10.3% 5-15%


Property 9.5% 2-20%


Cash 22.0% 15-50%


Allocation range

Australian Shares

29.0% 17-37%


23.0% 16-36%

Alternative Growth

7.0% 0-14%


Property 11.5% 3-20%


Cash 2.0% 0-30%


Allocation range

Australian Shares

39.7% 23-49%


31.6% 16-42%

Alternative Growth

10.0% 0-20%


Property 8.0% 2-16%

Global Debt 0% 0-10%

Cash 2.0% 0-25%


Allocation range

Australian Shares

35.2% 23-47%


28.8% 17-41%

Alternative Growth

4.0% 0-10%


Property 8.0% 0-16%


Cash 8.0% 5-30%


Defensive 66.1%

Growth 71.0%


Defensive 10.3%

Growth 72.0%

Defensive 28.0%


to 30 June


6.51% 4.89% 6.64% 7.08% 6.00% 6.66%


to 30 June


8.77% 5.23% 8.96% 10.33% 7.95% 10.96%


to 30 June


8.47% 5.35% 9.68% 11.78% 8.45% 12.79%


to 30 June


6.41% 6.52% 10.72% 13.86% 11.67% 14.54%








16

your choice asset classesInvestment Options Cash Global Bonds Property Infrastructure

Investment objective To earn a return after appropriate taxes and after investment fee and indirect costs, equivalent to higher than the RBA Cash Rate.

Is the most conservative of the Your Choice options. It aims to achieve its investment objective each year.

To earn a return after appropriate taxes and after investment fee and indirect costs, above:

• 50% Bloomberg AusBond Composite 0+ Year Index• 50% Barclays Capital Global Aggregate Hedged

to $A.

Aims to achieve its investment objective over the long-term (10 years).

Global Bonds:

• is less conservative than Your Choice – Cash• may produce a negative return, but• is more conservative than other Your Choice

options.

To earn a return after appropriate taxes and after investment fee and indirect costs, equivalent to or higher than CPI + 3.5%

Aims to achieve its investment objective over the long-term (10 years). It is less conservative than cash or bonds, as it has a higher chance of producing a negative return. However, it is more conservative than the remaining Your Choice options.


Aims to achieve its investment objective over the long-term (10 years). It has holdings in unlisted infrastructure companies. Although these holdings are not considered speculative, they are likely to produce negative returns from time-to-time as their returns are expected to comprise of capital gains (or losses) and income. Returns should be less volatile than other equity investments as the earnings of these companies are expected to be relatively stable.

Strategy Primarily invested in short-term bank deposits, and may include a small allocation to other cash investments.

Its investment earnings are primarily from income but may include some movement in values.

Is 100% invested in bonds and other debt products.

The underlying investments are similar for this asset class in Core Pool, being a range of global debt products (see page 7), but excluding some unlisted debt that is considered higher risk. All currency exposures in international debt are fully hedged.

Is invested primarily in unlisted property products, and has a 10% holding in cash investments. Your Choice – Property investments are managed in a similar style to that used by Core Pool for this asset class.

Is invested primarily in unlisted infrastructure products with a 10% holding in cash products. It will have investments in both Australian and international infrastructure. The underlying investments are similar to those for this asset class in Core Pool.


Less than 0.5 1 to less than 2 3 to less than 4 4 to less than 6

Risk level Very low Low to medium Medium to high High


Less than 1 year 1 to 3 years 5 to 7 years 5 to 7 years


Cautious

Or, an investor seeking to create their own diversified portfolio, who would like to include cash and cash products.

An investor seeking to create their own diversified portfolio, who would like to include debt and other fixed interest investments.

An investor seeking to create their own diversified portfolio, who would like to include Australian and international property.

An investor seeking to create their own diversified portfolio, who would like to include exposure to infrastructure assets.

Strategic asset allocation Asset class Strategic

allocationAllocation

range

Cash 100% 100%


Allocation range

Global debt

100% 100%


Allocation range

Cash 10% 5-15%

Property 90% 85-95%


Allocation range

Cash 10% 5-15%



Defensive 100.0%

Growth 0.0%


Defensive 55.0%

Growth 45.0%

Defensive 55.0%


to 30 June


3.57% 3.08% 2.96% 2.44% 2.15% 1.91%


to 30 June


5.61% 5.60% 5.30% 4.34% 4.13% 1.52%


to 30 June


6.66% 4.18% 8.50% 9.00% 10.12% 7.69%


to 30 June


8.24% 7.53% 9.88% 9.84% 10.39% 10.58%








17

Investment Options Cash Global Bonds Property Infrastructure

Investment objective To earn a return after appropriate taxes and after investment fee and indirect costs, equivalent to higher than the RBA Cash Rate.

Is the most conservative of the Your Choice options. It aims to achieve its investment objective each year.

To earn a return after appropriate taxes and after investment fee and indirect costs, above:

• 50% Bloomberg AusBond Composite 0+ Year Index• 50% Barclays Capital Global Aggregate Hedged

to $A.

Aims to achieve its investment objective over the long-term (10 years).

Global Bonds:

• is less conservative than Your Choice – Cash• may produce a negative return, but• is more conservative than other Your Choice

options.


Aims to achieve its investment objective over the long-term (10 years). It is less conservative than cash or bonds, as it has a higher chance of producing a negative return. However, it is more conservative than the remaining Your Choice options.


Aims to achieve its investment objective over the long-term (10 years). It has holdings in unlisted infrastructure companies. Although these holdings are not considered speculative, they are likely to produce negative returns from time-to-time as their returns are expected to comprise of capital gains (or losses) and income. Returns should be less volatile than other equity investments as the earnings of these companies are expected to be relatively stable.

Strategy Primarily invested in short-term bank deposits, and may include a small allocation to other cash investments.

Its investment earnings are primarily from income but may include some movement in values.

Is 100% invested in bonds and other debt products.

The underlying investments are similar for this asset class in Core Pool, being a range of global debt products (see page 7), but excluding some unlisted debt that is considered higher risk. All currency exposures in international debt are fully hedged.

Is invested primarily in unlisted property products, and has a 10% holding in cash investments. Your Choice – Property investments are managed in a similar style to that used by Core Pool for this asset class.

Is invested primarily in unlisted infrastructure products with a 10% holding in cash products. It will have investments in both Australian and international infrastructure. The underlying investments are similar to those for this asset class in Core Pool.


Less than 0.5 1 to less than 2 3 to less than 4 4 to less than 6

Risk level Very low Low to medium Medium to high High


Less than 1 year 1 to 3 years 5 to 7 years 5 to 7 years


Cautious

Or, an investor seeking to create their own diversified portfolio, who would like to include cash and cash products.

An investor seeking to create their own diversified portfolio, who would like to include debt and other fixed interest investments.

An investor seeking to create their own diversified portfolio, who would like to include Australian and international property.

An investor seeking to create their own diversified portfolio, who would like to include exposure to infrastructure assets.



range

Cash 100% 100%


Allocation range

Global debt

100% 100%


Allocation range

Cash 10% 5-15%

Property 90% 85-95%


Allocation range

Cash 10% 5-15%



Defensive 100.0%

Growth 0.0%


Defensive 55.0%

Growth 45.0%

Defensive 55.0%


to 30 June


3.57% 3.08% 2.96% 2.44% 2.15% 1.91%


to 30 June


5.61% 5.60% 5.30% 4.34% 4.13% 1.52%


to 30 June


6.66% 4.18% 8.50% 9.00% 10.12% 7.69%


to 30 June


8.24% 7.53% 9.88% 9.84% 10.39% 10.58%








18

your choice asset classes (continued)Investment Options International Shares Australian Shares Private Equity

Investment objective To earn a return after appropriate taxes and after investment fee and indirect costs, above:

• 50% MSCI All Country World ex Australia Index in $A Net Dividends Reinvested Unhedged

• 50% MSCI All Country World ex Australia Index in $A Net Dividends Reinvested Hedged.

Aims to achieve its investment objective over the long-term (10 years). It aims to produce a long-term return primarily from capital gains, however, it is very likely to produce negative returns from time-to-time.

To earn a return after appropriate taxes and after investment fee and indirect costs, above S&P/ASX 300 Accumulation Index.

Aims to achieve its investment objective over the long term (10 years). It aims to produce long-term returns primarily from capital gains, however, it is very likely to produce negative returns from time-to-time.

To earn a return after appropriate taxes and after investment fee and indirect costs, 3% or more above:

• 13.5% S&P/ASX 300 Accumulation Index• 76.5% MSCI World ex-Australia in $A Net Dividends

Reinvested Hedged• 10% RBA Cash Rate.

Aims to achieve its investment objective over the long term (10 years). It targets high long-term returns, primarily from capital gains, however, it is very likely to produce negative returns from time to time.

Strategy The underlying investments in Your Choice – International Shares are similar for this asset class in Core Pool. The currency exposures in international shares are managed under our active currency overlay program policy. It may include managers who also short sell shares.

The underlying investments in Your Choice – Australian Shares are similar for this asset class in Core Pool. Your Choice – Australian Shares investments are managed in a style similar to that used by Core Pool for this asset class. It can hold a small percentage of its assets in shares of companies not listed on the Australian Stock Exchange. It may include managers who also short sell shares.

Invests primarily in Australian and international private equity and also has a 10% holding in cash products. The underlying investments are similar to those for this asset class in Core Pool.


4 to less than 6 6 or greater 4 to less than 6

Risk level High Very high High


7 to 10 years 7 to 10 years 7 to 10 years


An investor seeking to create their own diversified portfolio, who would like to include exposure to listed international shares.

An investor seeking to create their own diversified portfolio, who would like to include exposure to listed Australian shares.

An investor seeking to create their own diversified portfolio, who would like to include exposure to Australian and international private equity products.



range

Cash 0% 0-25%

International shares

100% 75-100%


Allocation range

Cash 0% 0-25%

Australian Shares

100% 75-100%


Allocation range

Cash 10% 5-15%

Private equity

90% 85-95%

Overall growth/defensive split** Growth 100%

Defensive 0%

Growth 100%

Defensive 0%

Growth 90%

Defensive 10%


to 30 June


4.54% 4.78% 10.54% 14.53% 10.05% 18.66%


to 30 June


8.93% 5.10% 9.50% 11.50% 6.77% 12.66%


to 30 June


8.04% 9.13% 12.55% 13.02% 12.74% 9.87%

Ânnualised return covering the period 1/7/2001 to 30/6/2017. Ânnualised return covering the period 1/7/2001 to 30/6/2017. Ânnualised return covering the period 1/7/2001 to 30/6/2017.






19

Investment Options International Shares Australian Shares Private Equity

Investment objective To earn a return after appropriate taxes and after investment fee and indirect costs, above:

• 50% MSCI All Country World ex Australia Index in $A Net Dividends Reinvested Unhedged

• 50% MSCI All Country World ex Australia Index in $A Net Dividends Reinvested Hedged.

Aims to achieve its investment objective over the long-term (10 years). It aims to produce a long-term return primarily from capital gains, however, it is very likely to produce negative returns from time-to-time.

To earn a return after appropriate taxes and after investment fee and indirect costs, above S&P/ASX 300 Accumulation Index.

Aims to achieve its investment objective over the long term (10 years). It aims to produce long-term returns primarily from capital gains, however, it is very likely to produce negative returns from time-to-time.

To earn a return after appropriate taxes and after investment fee and indirect costs, 3% or more above:

• 13.5% S&P/ASX 300 Accumulation Index• 76.5% MSCI World ex-Australia in $A Net Dividends

Reinvested Hedged• 10% RBA Cash Rate.

Aims to achieve its investment objective over the long term (10 years). It targets high long-term returns, primarily from capital gains, however, it is very likely to produce negative returns from time to time.

Strategy The underlying investments in Your Choice – International Shares are similar for this asset class in Core Pool. The currency exposures in international shares are managed under our active currency overlay program policy. It may include managers who also short sell shares.

The underlying investments in Your Choice – Australian Shares are similar for this asset class in Core Pool. Your Choice – Australian Shares investments are managed in a style similar to that used by Core Pool for this asset class. It can hold a small percentage of its assets in shares of companies not listed on the Australian Stock Exchange. It may include managers who also short sell shares.

Invests primarily in Australian and international private equity and also has a 10% holding in cash products. The underlying investments are similar to those for this asset class in Core Pool.


4 to less than 6 6 or greater 4 to less than 6

Risk level High Very high High


7 to 10 years 7 to 10 years 7 to 10 years


An investor seeking to create their own diversified portfolio, who would like to include exposure to listed international shares.

An investor seeking to create their own diversified portfolio, who would like to include exposure to listed Australian shares.

An investor seeking to create their own diversified portfolio, who would like to include exposure to Australian and international private equity products.



range

Cash 0% 0-25%

International shares

100% 75-100%


Allocation range

Cash 0% 0-25%

Australian Shares

100% 75-100%


Allocation range

Cash 10% 5-15%

Private equity

90% 85-95%

Overall growth/defensive split** Growth 100%

Defensive 0%

Growth 100%

Defensive 0%

Growth 90%

Defensive 10%


to 30 June


4.54% 4.78% 10.54% 14.53% 10.05% 18.66%


to 30 June


8.93% 5.10% 9.50% 11.50% 6.77% 12.66%


to 30 June


8.04% 9.13% 12.55% 13.02% 12.74% 9.87%

Ânnualised return covering the period 1/7/2001 to 30/6/2017. Ânnualised return covering the period 1/7/2001 to 30/6/2017. Ânnualised return covering the period 1/7/2001 to 30/6/2017.





19

20

All options• Long-term probabilities of negative returns

are based on capital market assumptions and actual outcomes may vary. Source: Frontier Advisors Pty Ltd (Frontier).

• Long term means, on average, 10 years.• Managers may hold a small percentage of their

mandate in cash for portfolio management purposes.

• Investment performance is declared after the deduction of taxation and indirect costs as at 30 June 2017.

• Past performance is not a reliable indicator of future performance.

• Some investments within the property and infrastructure asset classes have a mix of higher and lower-risk exposures.

• No reserves are kept and no smoothing of investment returns occurs.

Ready-Made Investment Pools• Investment options other than Core Pool may

be excluded from having exposure to certain investments, while the investment value is built up to a targeted level.

• From time-to-time, Core Pool will invest in assets that do not fit into the asset classes described and do not have a strategic asset allocation. Generally, these other assets will be substitutes for unlisted assets (such as property, infrastructure or private equity) where Core Pool is, at the time, unable to fully invest to the strategic asset allocation.

Your Choice Asset Classes• Your Choice Asset Classes may be excluded from

having exposure to certain investments while the investment value is built up to a targeted level.

• Risk/return profiles are based on capital market assumptions including past performance. Actual outcomes and relative risk and return may vary.

Probable number of negative returnsThe probable number of negative returns over 20 years is calculated in accordance with a Standard Risk Measure all super funds are required to use. This measure aims to make it easier for members to compare investment options.

other things to note about HESTA investment options

The Standard Risk Measure describes risk based on how many negative annual returns you can expect over 20 years.

This Risk Measure shows an estimate of the probable number of times a negative return may be experienced over a 20-year period. But it does not estimate the frequency. For instance, two negative annual returns could be experienced successively over 20 years.

The Standard Risk Measure is forward-looking and uses a range of capital market assumptions (return, correlations and volatility) for each asset class. These assumptions are informed by historical investment information. Real investment performance may differ from this theoretical modelling and past performance is no guarantee of future investment returns.

While designed to help you better understand the potential risk of an investment option, the Standard Risk Measure does not assess all forms of investment risk.

For example, the risk measure doesn’t show you:

• how big a negative return might be• if returns will meet your investment objectives• the impact of fees and taxes on your return• other investment risks, such as market risks, liquidity

risk and credit risk.You should ensure you're comfortable with the risks and potential losses associated with your chosen option.

Risk levelThe Risk Level relates to the Standard Risk Measure. This allows you to compare investment options that are expected to deliver a similar number of negative annual returns over any 20 year period.

Investment managersWe engage a range of professional fund managers to invest members’ money according to specific objectives and strategies (including strategies to guard against excessive risk). These are set out by the HESTA Trustee Board with advice from our investment consultant, Frontier Advisors Pty Ltd. By using investment managers, we can apply their expertise to investing your retirement savings, while using our size to achieve economies of scale to keep costs low.

✓✓ A full list of our current investment managers is available at hesta.com.au/investmentmanagers

http://hesta.com.au/investments

21

Indirect Cost RatioThe Indirect Cost Ratio (ICR) is all indirect costs of a particular investment option as a proportion of the average total net assets through the year of that investment option. The ICR is not deducted from your account but from the earnings of investments, before unit prices are declared.

Investment feesInvestment costs that form part of the Investment fee for each investment option include the fees investment advisers and managers charge to invest in the assets in those options.

These investment costs vary from year-to-year, reflecting the blend of investment managers used.

Some investment managers can also charge additional performance fees if their investment returns are above an agreed hurdle (minimum) return. The hurdle return is usually based on the benchmark return for that asset class and investment manager.

Performance fees form part of the overall investment costs that contribute to the Investment fee for a particular investment option. Performance fees will only be charged where the investment manager’s return for the year (or an agreed longer period) is above the hurdle return.

✓✓ As with the ICR, the Investment fee is not deducted from your account but from the earnings of investments, before unit prices are declared. For more details about fees and costs, go to hesta.com.au/pds and read Fees and costs.

The Investment Fees and Indirect Cost Ratio will vary from year to year. The amounts provided in this document are derived from actual and estimated costs incurred in 2017/18.

How does HESTA compare?When looking at fees and costs keep in mind performance. HESTA may invest in some higher-fee assets to seek higher returns for members. The aim is to achieve higher returns net of any fees and costs. Some funds may provide a low — or even no fee investment option. While cheaper, these options may have lower investment objectives, and may not achieve sufficient long-term returns to grow your savings.

When comparing our fees and costs against other funds, it’s important to consider how fees and costs are charged and whether they are deducted from your account or deducted before investment earnings are applied. Some funds may have a lower investment fee but could be deducting more fees directly from their members’ accounts.

✓✓ For updated investment returns visit hesta.com.au/investmentperformance

fees, costs, policies and advice

Weekly switching is available to HESTA members. There is no extra cost to change your investment choice.

How does weekly switching work?Completed switching requests received by 11.59pm Tuesday (AET) will be processed that week (effective that Friday). Switching requests received after 11.59pm Tuesday will be processed the following week.

Incorrect or incomplete switching requests may delay the processing of switches. The Trustee has the discretion to refuse an application.

Changing your investment strategy


http://hesta.com.au/investments

22

investment policiesOur approach to responsible investmentResponsible investment is an approach to investing that explicitly incorporates consideration of Environmental, Social and Governance (ESG) issues on the basis that they can affect the value of an investment — for example, in a company, property or infrastructure asset — and therefore long-term returns to members.

Our Responsible Investment Policy outlines our principles and commitments to incorporating ESG considerations into our investment processes and decision-making. This includes the selection and monitoring of our external investment managers, and our ownership policies and practices such as share voting, company engagement and advocacy activities.

We seek to ensure all our external investment managers incorporate ESG issues into their investment analysis and decision-making processes. They may still choose to invest in a company where there are ESG risks if they believe the risks are reflected in the price. Our managers consider a broad range of ESG factors.

Examples of environmental factors include: • climate change• use of water and other

natural resources• pollution and waste.

Social factors include:• workplace health and safety• supply chain• labour standards• human rights.

Governance factors include:• board independence

and diversity• executive remuneration• bribery and corruption.

Our external investment managers are expected to assess ESG risks against the highest international laws, standards and guidelines in accordance with the United Nations Global Compact. The relevant international laws, standards and guidelines may differ depending on the particular ESG issue.

For example, when considering labour issues, our managers will be informed by the:

• United Nations (UN) Universal Declaration of Human Rights• International Labour Organization’s International Labour Standards• UN Convention on the Rights of the Child• OECD Guidelines for Multinational Enterprises• Global Compact’s Labour Principles.

Where we identify that a company’s policies, procedures or operations do not comply, directly or indirectly, with international laws, standards or guidelines and we believe all possible steps have been taken to try to change the company's approach, we will consider instructing our managers to divest.

Our investment restrictions and exclusionsIn addition to incorporating ESG factors into our investment processes and decision making, we have implemented some portfolio-wide restrictions and exclusions related to ESG issues. Note however implementation of the exclusions and restrictions may be affected by the accessibility and accuracy of data or an error by an external service provider. This may result in inadvertent holdings, typically over the short term, in companies we are seeking to avoid.

TobaccoAcross our entire portfolio we exclude investment in any company that produces and/or manufactures tobacco or tobacco products.

Thermal coalAlso across our entire portfolio we apply the following restrictions on new investment in:

• Any unlisted company that derives more than 15% of revenue or net asset value from exploration, new or expanded production, or transportation of thermal coal.

• Any newly listed company, from listing onwards, that derives more than 15% of revenue or net asset value from exploration, or new or expanded production of thermal coal.

• The provision of direct funding to any listed company, via rights issues or share placements, for any of these activities.

Controversial weaponsAcross our entire listed equities portfolio we are in the process of excluding investment in any company that produces controversial weapons defined as whole weapon systems or components developed for exclusive use in cluster munitions, anti-personnel mines, biological or chemical weapons.

23

Eco Pool Australian sharesBT Investment Management (BT) manages the Australian shares component of Eco Pool. BT aims to deliver solid returns by investing in companies with both high ESG ratings and attractive financial and valuation characteristics. BT obtains detailed ESG research and ratings on the largest 200 listed companies in Australia from Regnan – Governance Research and Engagement (Regnan). Regnan determine ESG ratings based on the exposure of a company to a particular ESG issue compared to the policies and systems in place to manage that issue. BT then combines the ESG ratings with a detailed assessment of each company’s valuation and financial potential to identify companies for inclusion in Eco Pool. BT continuously monitors these companies and will remove an investment where a stock no longer meets either the ESG or financial criteria.

Eco Pool international sharesGeneration Investment Management (Generation) manages Eco Pool international share investments. Generation’s investment approach is based on the belief that ESG factors directly affect long-term business profitability. Generation’s investment process is driven by robust internal research focused on integrating ESG issues with fundamental financial analysis in order to identify high quality businesses with high quality management teams. With only a small portfolio of companies, Generation analysts gain a comprehensive understanding of each company and the ESG factors affecting it. Generation continuously reviews a company’s quality assessment, and will withdraw investment when the review causes them to doubt the quality of the business.

Eco Pool global debtPIMCO manages the global debt component of Eco Pool. PIMCO evaluates ESG factors from both a top-down (longer-term macro-economic) view and bottom-up (sector and company selection) perspective. PIMCO identifies the major long-term themes that will impact the global economy and financial markets. They then blend this macroeconomic analysis with detailed analysis of individual issuers. PIMCO’s global debt research team and portfolio managers consider all potential risks and opportunities that could affect particular sectors or issuers, including those that are ESG-related, as part of their credit analysis and capital allocation decision-making processes.

Eco Pool propertyProperty investments in Eco Pool are required to achieve high environmental ratings. These ratings include above average NABERS Energy and NABERS Water ratings and 4 star and above for Green Star — Office Design and As Built (Green Building Council of Australia). The higher the environmental ratings, the greater the savings across key areas including energy use, greenhouse gas emissions, water consumption, and construction and demolition waste. The external property investment manager also needs to be highly rated by the Global Real Estate Sustainability Benchmark (GRESB). Investment restrictions and exclusions specific to Eco PoolIn addition to the portfolio-wide restrictions and exclusions, we have implemented more extensive restrictions and exclusions in Eco Pool. Note however implementation of the exclusions and restrictions may be affected by the accessibility and accuracy of data or an error by an external service provider. This may result in inadvertent holdings, typically over the short term, in companies we are seeking to avoid.Fossil fuelEco Pool has a more extensive exclusion on companies involved in fossil fuel than the thermal coal restrictions in the broader portfolio. Eco Pool excludes investment in any company that derives any revenue from the mining of thermal coal, or the extraction, production or refining of conventional and unconventional oil and gas; or derives more than 15% of revenue from the generation of electricity from fossil fuels or the transportation, distribution or retail of conventional and unconventional oil and gas; or more than 15% of revenue from the supply of equipment or services for the exploration and production of conventional and unconventional oil and gas activities. TobaccoIn addition to the portfolio-wide exclusion on companies that produce and/or manufacture tobacco or tobacco products, Eco Pool excludes any investment in companies that derive more than 15% of revenue from the manufacture and supply of key products necessary for the production or manufacture of tobacco or tobacco products or the wholesale or retail of tobacco or tobacco products.UraniumEco Pool excludes investments in companies involved in the mining or processing of uranium.

Sustainability reportingWe provide more information on our approach to responsible investment, including our engagement and active ownership activities in the HESTA Annual Report and on our website. Go to hesta.com.au/annualreport or hesta.com.au/responsible for more information.

Our approach to ESG specific to Eco PoolEco Pool investments are selected and managed according to more specific ESG requirements. The requirements are not solely based on risk management, but take into consideration the preferences of members that have selected this investment option.

http://www.hesta.com.au/annualreport

http://www.hesta.com.au/responsible

24

How is currency exposure managed?The Australian dollar value of an investment in an international asset may be affected in two ways:

• by changes in the value of the actual asset, and• by changes in the relative value of the Australian

dollar and the foreign currency.Because we have to convert all investments back to Australian dollars, if the value of the Australian dollar rises relative to a specific overseas currency, the value of the foreign assets will fall. Similarly, if the value of the Australian dollar falls, the value of foreign assets increases.

Currency hedging is a risk management strategy designed to reduce the impact of changes in the value of currencies on the value of foreign investment. Hedging can reduce a potential loss from unfavorable currency movements, but it can also reduce a potential profit.

Strategic foreign currency exposureAll Ready-Made Investment Pools have a specific level of long-term foreign currency exposure that is set by the HESTA Board, on advice from our investment experts and our asset consultant, Frontier. This is called the strategic foreign currency exposure. The remaining percentage of this currency exposure is hedged.

Foreign currency exposure for Your Choice Asset ClassesAll Your Choice Asset Classes — apart from International Shares — typically aim to have 100% of their foreign currency exposure hedged. This is to ensure that members who invest in these options receive the return of the respective underlying asset classes, unaffected by the impact of currency movements. There is capacity to reduce the hedge of the foreign currency exposure for these Your Choice Asset Classes where we decide that there will be a significant impact on performance.

International Shares also has a strategic foreign currency exposure that is set by the Board.

You can find the percentage of the strategic foreign currency exposure for each investment option in the table below. We also have the discretion to change the strategic foreign currency exposure at any time, within the ranges listed on the following page.

Active foreign currency hedgeThe strategic foreign currency exposure is implemented by specialist currency managers. For those investment options with exposure to international shares, the specialist currency managers can implement an active currency hedge. This is where the manager will change the percentage of foreign currency exposure to target additional returns for members.

25

Foreign currency exposure by investment option

Investment option Strategic foreign

currency exposure

(%)

Strategic foreign

currency exposure

range (%)

Active hedge

(%)

Core Pool 15.0% 0% – 50% Yes

Shares Plus 25.0% 0% – 60% Yes

Conservative Pool 7.5% 0% – 30% Yes

Eco Pool 15.0% 0% – 50% Yes

Your Choice – Property

0.0% 0% – 20% No

Your Choice – Infrastructure

0.0% 0% – 50% No

Your Choice – Private Equity

0.0% 0% – 70% No

Your Choice – Australian Shares

0.0% — No

Your Choice – International Shares

50% 0% – 100% Yes

Your Choice – Global Bonds

0.0% — No

DerivativesThese are often purchased as a form of investment insurance, and include:

• futures and options: agreements to buy or sell an asset like shares or bank bills in the future at a price set now

• forward rate agreements: agreements to borrow or lend money in the future at an interest rate set now

• swaps: an interest rate, currency or equity exchange between two parties

• warrants: certificates that enable a purchaser to buy stocks at a certain price within a set time frame

• Some HESTA investment options invest in derivatives.

Derivatives can be used to reduce portfolio risk, or increase it. We use tight controls to reduce unintended risk.

Investment consultantFrontier Advisors Pty Ltd (Frontier) advises us on investment objectives, strategies and investment managers. A 100% Australian-owned company providing investment advice to institutional investors, it currently advises around 18 wholesale clients. Total funds under advice as at 30 June 2017 stand at $262 billion.

Frontier sets out to identify special skills in investment managers that are expected to lead to superior performance over time.

Frontier is licensed by ASIC (AFSL No. 241266). The Trustee, H.E.S.T. Australia Limited, has shares in Frontier.

Returns: the basicsHow are investment returns determined?The rate of return for each investment option relies on applying the net returns (positive or negative) for each asset class in proportion to their weighting over the investment period.

When the options are unitised (see page 26) they will be divided into units and each member (who has elected to invest in that option) is allocated a number of units. The movement in the unit price will reflect the net return for each option and will be applied to the balance of each participating member.

The unit price goes up when there is a positive net return and the unit price goes down when there is a negative net return.

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Unit pricingHESTA applies unit pricing to report on members' account balances. Members' account balances are shown in the number of units allocated to each investment option they have selected.

You can see how much your current account balance is by looking up the unit price for your investment option applicable at the relevant week and multiplying it by the number of units held as at the relevant date in that investment option.

Payments, fees and or any other withdrawal from your account will reduce the number of units held, determined by dividing the amount by the relevant unit price.

We calculate the unit price for each investment option weekly so you continue to have an up-to-date account balance that reflects any market movements.

The change in unit prices reflects changes in the value of the assets held by each investment option and is used to determine the percentage investment return over time of each option. In times of poor investment performance, the unit price may go down.

You are still able to check the value of your account at any time, by logging in to Member Online at hesta.com.au/mol You will be able to see the number of units you hold, the current unit price and the total value you hold in each investment option, with the total of these making up your HESTA account balance.

Your next annual statement shows the value of your account based on the unit price of your selected investment options as at 30 June each year.

If you exit the Fund before 30 June, the last available weekly unit price will be used to calculate your withdrawal benefit.


2727

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your guide to investment termsSome terminology may be new to you. Read on to get a better understanding of commonly used investment terms.

AlphaAlpha is a measure of an investment or investment portfolio’s performance against a benchmark. An active manager (see Passive versus active management definition) will aim for positive alpha returns, meaning they aim to outperform a particular benchmark. For example, an active manager investing in Australian equities will aim to outperform an index such as the Standard and Poor's (S&P)/Australian Securities Exchange (ASX) Australian All Ordinaries index. In other words, alpha is the additional returns achieved above the Beta (see Beta definition) return of the market.

When an active manager achieves alpha, they often expect to charge a higher fee for this outperformance (see Passive versus active investment management definition).

AssetSomething that can be held or sold for the purpose of earning a return.

Asset classesA group of similar assets. The main asset classes include shares, debt, property and cash. Each asset class has a different level of expected risk and return.

Asset allocation rangesThese allow us to make adjustments to how we invest. For example, if a downturn in the share market seems likely, we may reduce exposure to shares in favour of cash to protect returns over that period.

BetaA common use of the term 'beta' refers to the return of a particular market or index. For example, if you want to invest in the Australian equities market, then this use of the term 'beta' would describe the return from the S&P/ASX All Ordinaries Accumulation index.

An investment’s beta return is that part of the investment's performance that is deemed to be attributable to the overall market returns. An investment manager who aims for returns very close to a market index is targeting the beta return. This type of strategy is known as passive investing (see Passive versus active investment management definition). Our investment options, where appropriate, include investments in passive portfolios, as the investment costs on passive portfolios are generally very low.

CleantechCurrently, Eco Pool's Alternative Growth investments are in private equity Cleantech. Cleantech includes products or services that generate environmental benefits through significant reduced reliance on fossil fuels, reduced use of energy and resources, reduced or eliminated emissions and wastes or other environmental protections principally in the energy, water, waste, transportation, agriculture and manufacturing sectors.

Compound interestThe snowballing effect of earning interest on your accumulated interest. Interest is calculated on both the principal (your account balance and contributions) and the interest that has already built up. Interest may be positive or negative. Over time, the size of your interest earnings on past contributions may grow to be larger than the contributions themselves.

Currency hedgingInternational investments are vulnerable to changes in the value of the Australian dollar. Currency hedging means locking in the price for a future purchase or sale of currency to help reduce the effect of these changes. While a currency hedge can decrease potential loss, it can also reduce potential profits. See investment policies (page 22) for more information.

Diversification/balanced asset mixA strategy that spreads investments across a variety of asset classes to help reduce the impact of underperformance by any one class. Each asset class behaves in a different way. As one rises in value, another may fall. By carefully balancing the relationships between asset classes, managers can produce a portfolio with a lower risk for the targeted level of return. This strategy is used to manage many diversified portfolios including the Ready-Made Investment Pools (p. 14-15).

Responsible investingResponsible investment is an approach to investing that explicitly incorporates consideration of environmental, social and governance (ESG) issues on the basis that they can affect the value of an investment and therefore long-term returns to members. This investment approach involves managers explicitly considering these issues when analysing an investment. See investment policies (page 22) for more information.

29

your guide to investment termsSome terminology may be new to you. Read on to get a better understanding of commonly used investment terms.

IndicesThe indices we use are:

Barclays Capital Global AggregateIncludes global investment grade debt of all maturities and covers both developed and emerging markets issuers.

Bloomberg AusBond Composite 0+ Year IndexThe Bloomberg AusBond Composite Bond Index includes investment grade fixed interest bonds of all maturities issued in the Australian debt market.

Consumer Price Index (CPI)Consumer Price Index is a measure of quarterly changes in the price of everyday goods and services — i.e. groceries, transport, medical care etc. It’s calculated by the Reserve Bank of Australia (RBA) using price changes for each assessed item and averaging them. Changes in CPI are used to measure changes in the cost of living.

MSCI All Country World ex Australia IndexThe Morgan Stanley Capital International (MSCI) All Country World Index (excluding Australia) tracks large and mid-cap shares from developed and emerging market countries.

MSCI World ex Australia IndexThe Morgan Stanley Capital International (MSCI) World Index (excluding Australia) tracks large and mid-cap shares from developed market countries.

Reserve Bank of Australia (RBA) Cash RateThe interest rate financial institutions pay to borrow or charge to lend funds in the money market on an overnight basis. The RBA publishes the cash rate daily.

S&P/ASX 300 Accumulation IndexStandard and Poor’s (S&P) in collaboration with the Australian Securities Exchange (ASX) provide this index. It includes up to 300 of Australia’s largest securities by float-adjusted market capitalisation. The index assumes that all dividends are re-invested, so it measures both price growth and dividend income.

Passive versus active investment managementInvestment options are managed by a combination of passive and active managers, depending on each option’s strategy. Passive investment management aims for returns very close to a market index (see Beta definition). Active investment management is more aggressive, trying to outperform the market by researching, monitoring and choosing investments that the managers believe can deliver a better return than the market index (see Alpha definition).

Active managers often expect to charge a higher fee for this outperformance. An investor will pay higher fees using active strategies. If outperformance is achieved, however, the investor should also benefit from higher returns net of any fees paid.

HESTA only employs active managers where we believe they can achieve sufficient outperformance to justify the higher fees that they charge. It is important when considering an investment option to not only look at the investment costs but also the long-term performance. Where appropriate, investment options are managed by a combination of active and passive managers.

PortfolioA range of investments across a group of asset classes, managed together as a portfolio to achieve a single performance objective.

Short sellingA strategy that can be applied to many asset classes, in which shares and other assets are borrowed and sold with the aim of buying them back at a lower price to generate a profit. We allow short selling of shares in line with government regulations, as they provide an opportunity to profit from falling, as well as rising, prices. Short selling can help lower the risk of HESTA investment options that include shares.

Strategic asset allocationThe proportion of each HESTA investment option that may be invested in each asset class to achieve the option’s long-term risk and return objectives. The strategic asset allocation is the main influence on the expected return of any investment.

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need a little help

from a friend?

Education and advice – how can we help? Believe it or not, if you can manage the household budget, you can easily manage your super. With the right guidance, your super really can be just as straightforward.

Our financial education and advice service is here to give you that guidance. Our Member Education Managers, Superannuation Advisers and Financial Planners can help make super relevant and show you some hassle-free ways to boost your super and protect your future.

Getting the right advice, starts with youOf course, getting the right advice starts with understanding what you want and which option fits in best with your life. In addition to advice, we also provide a variety of education options — from the convenience of online education, right through to workplace education sessions — all you need to do is choose the options that work best for you.

31

contact [email protected] | 1800 813 327 | Locked Bag 5136, Parramatta NSW 2124 | hesta.com.au

Workplace education sessions — let us come to you• How super works• Transition to retirement• Government co-contributions• Easy money management• Combining super• Low-cost banking services

for membersReady to book in for an education session? Simply visit hesta.com.au/workplacevisit or call us on 1800 813 327.

Online education — 24/7 education at home• Financial goal setting• Income streams• Financial planning• Saving• Social security• Retirement basicsImprove your financial skills today at hesta.com.au/money101

Education

Advice

Retirement planning information sessions — demystify retirement • Boosting your super

before retirement• Transition to retirement• Stretching your super further• Creating a comfortable

retirement• Super and the Age Pension

Financial planning — full service advice • Making your investments

work harder• Setting your retirement goals.• Super and the Age Pension• Your super and tax• Creating a contributions

strategy that works for you• Aged Care• Provided on a fee-for-service basis• Personalised advice for couples• Investments outside of super

Personal retirement advice — get the most out of your retirement • Help with creating a

personalised transition to retirement strategy

• Advice on choosing the investment options to suit your needs

• Maintaining your super and insurance when you start accessing your super

• One low fixed fee (currently $695), deducted straight from your HESTA account

One-on-one advice — at no-extra cost• Review your investment options• Determine the adequacy of your

income in retirement• Determine the most tax-effective

way to make additional contributions to your super

• Consider your insurance needs

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